Topics in Middle Eastern and African Economies Vol. 14, September 2012 102 DETERMINANTS OF PRIVATE SAVINGS AND INTERACTION BETWEEN PUBLIC & PRIVATE SAVINGS IN TURKEY Eser Pirgan Matur Ali Sabuncu Sema Bahçeci General Directorate of Economic Modeling and Strategic Research, T.R. Ministry of Development JEL classification: E20, E21, E23
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Topics in Middle Eastern and African Economies
Vol. 14, September 2012
102
DETERMINANTS OF PRIVATE SAVINGS AND INTERACTION
BETWEEN PUBLIC & PRIVATE SAVINGS IN TURKEY
Eser Pirgan Matur
Ali Sabuncu Sema Bahçeci
General Directorate of Economic Modeling and Strategic Research, T.R. Ministry of Development
JEL classification: E20, E21, E23
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Vol. 14, September 2012
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1. Introduction
Turkey has a low national saving rate compared to countries with similar levels of income.
Furthermore, the national saving rate has a declining trend since 1988. In the period of 1988-
2002 private saving rate displayed a stable path, while public saving rate exhibited a trend
decline, pulling the national saving rates downward. However, these patterns changed radically
after 2002. Public saving rates marked a considerable increase due to the fiscal austerity
measures, whereas private saving rates showed a striking decline, rendering a quite low
national saving rate by international standards (Hevia, 2010).
The rapid decline in national saving rates and the fact that the decline in the recent period was
primarily driven by the private sector causes concerns about the sustainability of growth in
Turkey. The decline in saving rates manifests itself in increasing current account deficits. Even
though Turkey enjoyed large capital inflows and benefited from foreign savings to partially
finance growth in the recent years, the increasing dependence on foreign capital flows as a
major source of finance makes the economy fragile to sudden stops or reversal of capital flows.
The memories of past crises driven by internal or external factors, such as the 1994 crisis, the
2001 crisis and finally the 2008-2009 global financial crisis aggravates these concerns. The first
two cases provides evidence for the detrimental effects of a sudden stop of capital flows and
the experience of the global financial crisis puts into question foreign capital flows as a reliable
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and stable source of finance. All of these experiences underline the importance of national
savings.
Therefore, understanding the dynamics behind savings and the possible policy options to
increase the national savings rate is of interest both to researchers and policy makers.
The purpose of this paper is first to identify the policy and non-policy determinants of private
savings rates in the Turkish economy by using new saving data series for 1980-2008 period
produced by SPO. Then, the interaction between public and private savings will be investigated
in order to determine potential fiscal policy options to increase domestic savings in Turkey.
The theoretical and empirical literature on savings is quite comprehensive. While part of the
empirical literature focuses on cross-country analysis, the rest of the related literature focuses
on country-specific characteristics. Cross-country analyses generally rely on macro data sets to
identify the dynamics of savings, whereas at the country level it is possible to encounter studies
that utilize either household level data or macro data.
Loayza, Schmidt-Hebbel and Serven (2000), which uses a very large country data set, provides
one of the most comprehensive framework for the analysis of savings and it was used as the
departure point of the empirical analysis of private savings in this paper. Özcan-Günay-Ertaç
(2003), IMF (2007) and Van Rijckeghem (2010) also have findings relevant for the discussion
regarding the interaction between private savings and fiscal variables in the Turkish case. Our
work improves on previous studies with a new data set and a larger time-span.
The next section briefly reviews consumption theories and potential determinants of private
savings in Turkey. Section 3 discusses the data and estimation results for the benchmark model.
Section 4 elaborates the interaction between fiscal policy and private savings. Section 5
summarizes the concluding remarks.
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2. Determinants of Private Savings in Turkey
Saving can be defined as part of disposable income that is not allocated to consumption.
Therefore consumption and saving decisions of economic agents in one period are
simultaneously taken. Economic agents intend to increase their utility through their
consumption decisions. However, usually they do not only focus on consumption today, but also
on their future consumption. Therefore, the consumption decisions of economic agents are
taken in an intertemporal framework and they are dynamically linked. Savings of individuals
help them shift resources between different periods of their life-time in order to smooth their
consumption path. This implies that savings are also determined in an intertemporal framework
and can be regarded as deferred consumption.
The saving decisions of rational agents are, therefore, expected to reflect the forward looking
intertemporal utility maximization. Private agents consider their whole life span or planning
horizon, their wealth and expected incomes in each period, relative prices in the economy, their
preferences and how they value consumption in different periods and decide on how much to
consume/save from their contemporaneous income. This framework broadly defines the
essential setup of Life Cycle Hypothesis developed by Irving Fisher, Roy Harrod, Albert
Ando and Franco Modigliani. This hypothesis has intensively been referred in the analysis of
consumption and saving patterns and implies that unconstrained individuals consume a
constant percentage of the present value of their life time income, due to the consumption
smoothing motive.
Even though the Life Cycle Hypothesis does not explain consumption behavior to full extent,
most of the more contemporaneous theories of consumption share its essence, i.e.
consumption decisions are regarded in an intertemporal framework and consumption
smoothing surfaces as an important motive. Therefore, in this paper, we don’t rely on a
structural model of consumption/saving decisions, but rather we follow an empirical approach
using a reduced form model for savings. This allows us to include several important potential
determinants of savings proposed by different theories.
Income Growth) +0.04(Inflation) -0.37(Private Credit/GDP) +0.15(Real Interest Rate) –4.64(Old
Dependency Rate)
The results of the benchmark model verify our theoretical expectations:
Public saving rate has a negative impact on private savings, i.e. increases in public
savings are partially offset by a fall in private savings. This part is discussed in detail in
the following section.
Per capita real income has a positive and statistically significant relation with private
savings.
Growth of per capita income has a negative impact in line with the expectations of
permanent income hypothesis and intertemporal theories of consumption.
Inflation, which represents uncertainty in our model, has a positive impact on savings
due to precautionary saving motives.
An increase in the banking credits to the private sector indicates the relaxation of
liquidity constraints of individuals and therefore has a negative impact on savings.
Considering the real interest rates, we observe that the positive substitution effect
outweighs the negative income effect in the case of Turkey and real interest rate has a
positive impact on private savings.
Old dependency ratio has a negative impact on private savings as expected.
In order to test for a relevant long run relationship between the above variables, we also test
for the stationarity of the error term of our benchmark model and find that the error term is
stationary at 99 percent confidence level. The result of the unit root test is given in the
Appendix.
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In order to further strengthen the statistical relevance of our results, we also undertake a
cointegration analysis considering the benchmark model and these results also indicate that
there is cointegration between our variables. The results of the Johansen cointegration tests for
the benchmark model and model 1* are given in the Appendix.
4. Interaction Between Public and Private Savings
One of the main aims of this study is to identify the interaction between public and private
savings in Turkey.
A specific version of the intertemporal theories of consumption comes up with the idea of a
complementary relationship between private and public savings. If the households give their
consumption decisions in an intertemporal framework where they try to maximize their life-
time utility under the life-time budget constraint and there is no impediment to shifting their
resources between periods during their life-time (like borrowing constraints etc.), the
consumption decision taken today will only be affected by factors that change the life-time
budget constraint of the household (assuming no shocks to preferences). If these agents are
rational, they internalize the actions of the government in their budget constraint. In this case,
changes in fiscal policy, such as increasing/decreasing tax rates today will imply higher/lower
debt levels in the future and an accompanying tax increase/decrease to repay existing debt.
Under this setting, the discounted value of future taxes will not change and will not have an
impact on the life-time budget constraint of households, leaving their consumption decisions
intact today.
The fact that consumption is not affected by changes in taxes (or government saving) implies
that private savings (disposable income minus net taxes minus private consumption) reduces
exactly by the same amount as the change in government savings. This suggests that there is
one-to-one negative relationship between private and public savings, which is called full
Ricardian equivalence. However, the underlying assumptions of full Ricardian equivalence are
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very restrictive and are usually not satisfied in practice and it is rejected in most empirical
studies3. Even though there is very little support for full Ricardian equivalence, the degree of
relevance of this proposition is of interest to policy makers.
In international studies covering different developed and developing countries with different
time spans, the estimated Ricardian offset coefficients lie in a wide range. Lopez, Hebbel and
Serven (2000) reports a range between -0.35 and -0.77. In empirical estimations for Turkey, the
Ricardian offset coefficients also range between -0.42 and -0.774. In this exercise, we come up
with a Ricardian offset coefficient between -0.38 and -0.58, which is on the lower side of
previous estimations for Turkey. The estimation results indicate that there might be some room
for increasing national savings through increasing public savings in Turkey. However, it should
be noted that increasing public savings might have its own costs if it is achieved through
reducing productive expenditures of the government.
Having identified public savings as one of the important determinants of private savings, we can
consider the direct impact of different fiscal policy tools. We perform two types of experiments
in this regard. In the first experiment, we remove public saving from our benchmark model and
try to see the impact of different policy tools one at a time. These results are given in Table 1.
The results indicate that increasing taxes on goods and services have a positive impact on
private savings. The increase in taxes penalizes/discourages consumption through increasing the
effective price of consumption goods, leading to an increase in the private saving rate. Similarly,
the impact of an increase in the ratio of total tax revenues also has a positive impact on private
savings. We think that this result is closely related with the fact that taxes on goods and services
have a very high share in total tax revenues in Turkey (around 60 per cent in recent years).
However, when these results are considered from a policy perspective, they don’t offer much
3 See Corbo and Schmidt-Hebbel (1991) for a detailed literature survey.
4 Caroline Van Rijckeghem (2010) finds an offset coefficient of -0.63 in her key specification; Metin Özcan, Günay,
Ertaç (2003) finds an offset coefficient between -0.42 and -0.656; IMF (2007) finds an offset coefficient between -
0.72 and -0.77.
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room for a policy intervention to increase private savings given the already very high share of
indirect taxes in total tax revenues.
Another important fiscal variable is the ratio of social security premiums. Social security
premiums can be considered as involuntary savings as registration in the social security system
is obligatory in Turkey. On one hand an increase in the ratio of social security premiums might
cause a shift from private saving accounts to public saving accounts. However, given that the
ratio of informality is very high in Turkey, even though registration in the social security system
is obligatory, an increase in the ratio of social security premiums might also reflect an increase
in the importance given to pension systems by economic agents. Therefore, it might also reflect
a taste for longer term savings. In that case, we might expect a positive relationship between
the ratio of social security premiums and private savings. In the equation, the sign of the ratio of
social security premiums is positive, but it is statistically insignificant.
Another important expenditure item in the budget has been interest payment for many years in
Turkey. Throughout the 1990s real interest rates in Turkey increased to unsustainable levels and
the share of interest rate payments to GDP climbed to unacceptable levels. High real interest
rates and high transfers in the form of interest payments had an important impact on economic
decisions in Turkey for a quite long time period. For this reason, the impact of the ratio of
interest payments to GDP is also important, even though it is not a direct policy variable for
governments at a given point in time. From our empirical results, we observe that the ratio of
interest payments has a positive and statistically significant relation with the ratio of private
savings in Turkey. When we further disaggregate interest payments as domestic interest
payments and foreign interest payments, we observe that this positive and significant
relationship can be attributed to domestic interest payments and that foreign interest payments
have no significant impact on private savings, as expected.
If we compare the results of the benchmark model with model 6 and model 7 (where interest
payments and domestic interest payments are included), we can realize that the coefficient of
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the real interest rate variable is smaller for model 6 and 7. Since Turkey experienced a vicious
cycle of higher debt burden-higher interest payments-higher real interest rates in at least one
third of our sample period, the real interest rates and the ratio of interest payments to GDP
displays a similar pattern and the interest payment variable captures some part of the impact of
real interest rates. We can infer from these results that very high interest rates (and
accompanying high interest payments) creates a strong motive for private savings. This finding
can explain part of the rapid fall in private savings in recent years.
5. Concluding Remarks
When we consider all the findings regarding the relationship between fiscal variables and
private savings, we can claim that increasing public savings might create some room for
increasing national savings. However, increasing public savings can only be considered as a real
policy option as long as the extra saving in the public sector comes from unproductive
expenditures. Productive expenditures, which support future growth, can not be considered as
a good source for increasing savings, since the development level of a country (the level of per
capita income) plays a very important role for savings. On the other hand, increasing indirect
taxes does not seem to be a feasible tool given the very high share of indirect taxes in tax
revenues in Turkey.
All in all, fiscal policy in Turkey does not have a very promising role for increasing savings. This
finding is in line with previous studies which find that the ability of policy to affect the private
saving rate is limited in Turkey (Caroline Van Rijckeghem, 2010). Previously, tools such as debt
tax and interest taxation have been proposed as relevant fiscal policy options to increase private
savings (Caroline Van Rijckeghem, 2010).
Even though fiscal policy does not seem to have a large room to influence private savings, it
should be underlined that it might have a very important role to play in supporting the growth
process. Higher growth might lead to a reduction of savings in the short run; however increases
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in the level of income will pay in the longer term in terms of savings. Given the argument that
higher growth precedes higher savings and countries that undergo growth transitions do end up
with permanently higher saving rates (Gavin, Hausmann and Talvi, 1997; Rodrik, 2000), the
policy should focus on removing the impediments to growth and reducing the vulnerability
resulting from low savings during the transition period. In order to reduce the vulnerability
associated with excessive dependence on external finance, other areas of macroeconomic
policy like monetary and exchange rate policy might have a role to play.
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REFERENCES
Corbo V. and Schmidt-Hebbel K. (1991), “Public Policies and Saving in Developing Countries”, Journal of Development Economics, 36, pp. 89-115.
Gavin, M, Hausmann, R. and Talvi, E. (1997), “Saving behavior in Latin America: Overview and Policy Issues”, Inter-American Development Bank, W.P. 346.
Hevia, Constantino (May 2010), “Saving in Turkey: An International Comparison” Paper presented at the World Bank Workshop on Country Economic Memorandum on Savings and Growth.
IMF (November 2007), “ Safe to Save Less? Assessing the Recent Decline in Turkey’s Private Saving Rate“, Turkey: Selected Issues IMF Country Report No. 07/364.
Loayza, Norman, Klaus Schmit-Hebbel, and Luis Serven (2000), “Saving in Developing Countries: An Overview,” World Bank Economic Review, Vol.14 (No.3), pp.393-414.
Lopez, Hebbel and Serven (2000), “How Effective is Fiscal Policy in Raising National Saving?”, The Review of Economics and Statistics, 82(2), pp. 226-238.
Ozcan, K.M., Gunay, A.M. and Ertac, S. (2003), “Determinants of Private Saving Behavior in Turkey” Applied Economics, 35, pp 1405-16.
Rodrik, Dani (2000), “Saving Transitions”, The World Bank Economic Review, Vol.14, no:3, pp.481-507.
Van Rijckeghem C. (2010), “Determinants of Private Saving in Turkey: an Update”, manuscript.
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Table 1. Determination of Private Savings and Relation with Fiscal Variables-I